All Forum Posts by: Kyle Joseph

I think @AJ Wong's post is generally on point. The seller may anchor to that 5% interest rate because in theory they could put it in a savings account or CD and make 5% (ignoring taxes for now). Personally, rather than push on rate I would go for max flexibility on the repayment. How long will it require to implement your business plan and rent / stabilize the property? Make sure you have more than enough time to do that and and be able to show a strong trailing NOI when you go into refi. So I would focus on no prepayment penalties (you didn't mention any which is good) and also maximize the flexibility on when you repay, whether that's a longer initial term or options to extend.

Depending on whether you manage yourself or hire property management, your return on equity seems very strong for having no debt on the properties. If you are paying a property manager and still generating $84,000 cashflow on $800,000 equity, your return on equity is over 10%.

If you think that you can generate a lot more cashflow relative to the amount of equity in other investments, then I would consider selling and doing a 1031 exchange into larger property(ies). I just did this with a duplex and bought a 6-unit property in my market. Long story short, I had $150K equity in the duplex (due to appreciation) and was cashflowing very little - $5,000 per year. So my return on equity on equity was 3.33% ($5,000 / $150,000). I sold the duplex and bought a 6-unit property that will generate over $15,000 per year in cashflow, which is over a 10.00% return on equity ($15,000+ / $150,000). Even with the higher rates, I am able to generate a lot more cashflow from that same amount of equity.  

@Tyson E Keslar There are a lot of variables to consider in addition to the roles and responsibilities that you have outlined. Some big ones that you guys can talk about before getting lawyers/CPAs involved to see if you are in agreement are things like identifying key decision rights and determine who has those if there is a disagreement (leasing decisions, refinancing, sale, choosing a property manager, scope of capex and renovations, etc) and determining profit/distribution splits. An attorney will help you work through other issues and matters, as there will be several that you guys need to sort out. 

Also, before you guys spend a lot of time and money working through a partnership to be used on several deals, it may be worth finding a deal to do together, keep it simple, and see how you guys like to work together.

@Jeroh Odafe It really depends how much you need to spend in capex to get the property the the $1,050,000. If you can share that number, at a minimum, you'll get more informed responses. If you want some help ballparking those costs, let me know and I'm happy to help.

Lawrence - congratulations. I'm always happy to be a resource and help you evaluate and underwrite deals, both to buy existing and to build. Sounds like you know that you want to find a 4-unit property. Have you selected the market, return criteria, etc.? It may be helpful to dial in your parameters a little bit so that you can be focused on finding exactly what you want, whether on market or off market.

My two cents is to not let the financing drive your decision making. Are your 14 other SFHs in similar Class C locations / condition? If so, lean on your experience with those to underwrite vacancy, bad debt, repairs, etc. appropriately for the condition and location of these properties. If the property being Class C is outside of your wheelhouse and you're not ready to commit to the work and risks required to own and manage a class C property, and your only drawn to it by getting a big seller financed note, I would pass and look elsewhere. 

Great post. There is risk to investing in real estate, and you can mitigate a lot of that risk by underwriting the property correctly. So that you "make your money on the purchase". Others have pointed out the differences between Class A vs B vs C properties. You should be underwriting repairs, bad debt, vacancy, etc. differently for these types of properties. Things like the 1% rule and other metrics are a good initial barometer, but there is a lot of nuance to these properties. Even if they are small multi or SFR. If you're not sure whether you are appropriately capturing costs for a property, the forums are a great place to get a second opinion. I'm always happy to take a look and provide an opinion as well.

Depends what you mean by "making the numbers work". I would recommend investing the time (and financial resources, if necessary) into doing outreach directly to property owners. And see if you can get comfortable with the idea of buying something that needs some improvement. Maybe it's your unit that needs improvement and you can do that over time, while the other units are in better shape so you can lease them at top of market rates from the start. It will go a long way in making your numbers work. 

Jordan - I messaged you privately with more information. I work with investors on just this, and have an Excel underwriting model that I share.

Seems like the general consensus is the quality of the inputs and the ability to sensitize them is the most important aspect / biggest challenge, so that you understand the potential outcomes. And I think also to think through the probability of these outcomes. Another way to think about it is that I bet the worst deals ever done were modeled in a perfectly working model. They weren't bad deals because of a formula error.